The TSX Venture has been the worst performing stock exchange in North America for over a year now.

For many companies on the TSX Venture, this is a time period filled with anxiety; much like it was in late 2008, the Venture has fallen to the hands of panic sellers. Investors are scared and have been thinking illogically for several months now. Companies that were being bought for $1.00 per share with heavy volume, just 12 months ago, are having a hard time finding bids in this market for $0.30. Volume and risk appetite have vanished. Again, this is similar to how it was in December of 2008 in that respect.

It's funny how quickly the psyche of investors can change. And this latest correction in the TSX Venture (a 1 year collapse in value of roughly 45%), is a testament to how powerful emotions are when it comes to moving markets.

This latest correction is the second worst (from a percentage standpoint) in the TSX Venture's history - yet commodity prices remain at historically high levels and the Dow continues to shake off all negative macro-economic data.

Venture investors are scratching their heads as to why this is happening.

The truth is that the TSX Venture has always been a boom/bust exchange. It's extremely volatile. The exchange has existed for 11 years and during that time, it has gone through 7 bear markets of its own (market downturns of 20% or more).

Let's think about the global economic situation for a few seconds. What has really changed in the last 12 months that would cause the Venture to lose 45% of its value?

Last year we were all well aware of Europe's debt crisis and the potential for it to spill into other countries. We were all well aware that America's national debt was skyrocketing out of control. We knew inflation was going to hit the world in a meaningful way (good news for commodity plays), but didn't know exactly when. We knew China's growth was going to temporarily slow down. Commodity prices were flirting with record high levels. Unemployment in the Western World was historically high. What's changed?

The answer is nothing. Uncertainty has hung around the market for a couple years now. The only thing that has changed is the date on your calendar. We are living in just as uncertain times as we were in April of 2011. As mentioned, this hasn't bothered the Dow Jones. It has continued its ascent to flirt with record highs. Meanwhile, the TSX Venture, an exchange that is heavily weighted in commodities, and more specifically, mineral exploration, has collapsed.

If you had been living under a rock for the last 12 months and woke up looking at a one year chart of the TSX Venture, you would make the assumption it has fallen because gold, copper, silver and oil have probably dropped in value at a rapid rate. This is of course, not the case. Sure, gold and silver have come off their record highs in 2011, but they still remain at historically high values. The miners of these two precious metals are making record margins. Fundamentally, that is fantastic news for the TSX Venture and the explorers which trade on the exchange. However, the reality is quite different than fantastic. Share prices of these exploration companies have been decimated over the last 12 months. This sell-off has been entirely fear driven. Uncertainty and long-term unknowns, in respect to many of the largest economies in the world, have taken the risk appetite out of the markets and left the Venture alone at the bottom of a dark hole.

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The TSX Venture is Trading at the Same Level it Did Nearly 9 Years Ago

In October of 2003, the TSX Venture Exchange traded at the same level it does today. What's important to note about October 2003 is that gold traded for roughly $380 an ounce - it trades 425% higher today. In October of 2003, silver traded for about $5 an ounce - it trades 600% higher today. In October of 2003, a barrel of oil traded for $30 - it trades 320% higher today. In October 2003, Comex copper traded for $0.92 - it currently trades 415% higher.

Aside from these commodities trading near record highs (the main commodities the 1275 explorers/miners on the venture are drilling for), it has become increasingly difficult for explorers to make economic discoveries. Many of the world-class deposits are being mined right now because of the record high prices. Simply put, there isn't nearly as many world-class commodity assets on the globe as there were in 2003. So wouldn't it make sense that these companies, with proven discoveries, be valued higher in this market environment?

Fortunately for us bottom fishers, 'risk' has become a dirty word. This mindset has resulted in fire sale prices on many great investment opportunities within the TSX Venture Exchange.

As everyone already knows, the TSX Venture is predominantly a mining and commodity based exchange. Its value, historically, has risen and fallen with the price of commodities. There are 1,275 mining/exploration companies on the TSX Venture alone - no exchange on the planet even comes close to that amount. It's the 'go to' exchange when looking to invest in the next major discovery.

Looking Back on The TSX Venture's Many Downturns and the Amazing Opportunities That Have Always Followed

The TSX Venture is no stranger to volatility and sharp corrections. It's a small-cap exchange comprised mainly of exploration companies - both early-staged and advanced.

The exploration companies on the Venture don't cash-flow, that's not what they're about. These companies are about making discoveries and being bought out, or years later going into production and then cash-flowing. When a company doesn't cash-flow and only drills, it must regularly go to the market for financings. This creates uncertainty and volatility. This creates the fear factor we are seeing in the market right now. During uncertain times, investors are fearful that many companies on the Venture won't be able to raise capital and could potentially dissolve. This, in most cases, is an irrational fear. Many companies have deep pocketed management teams which can raise capital in any market. Some companies won't need to raise capital for another 2 years. Let's not forget that we recently came off the greatest rally in the TSX Venture's history (December 2008 - March 2011) and the fundamentally sound explorers were able to raise major cash at much higher levels than today. Many of these prudent juniors are sitting on several million dollars in their treasuries from previous financings.

Let's also not forget how nimble these junior explorers can be when hard times hit. These companies don't have hundreds of employees on the payroll. Drillers are typically on contract work and many of these junior explorers have a dozen full-time workers or less. A junior with a burn rate of half a million dollars a month can quite easily cut that down to $50k by stopping drilling during a down market. After all, as you will soon see, a typical bear market for the TSX Venture only lasts 5.8 months anyway.

Because of the Venture's capital intensive business models (particularly with its 1275 mining/exploration companies), it should come as no surprise that this exchange has experienced 7 bear markets (a correction of 20% or more) in its 11 year history.

Ten Year Chart for the TSX Venture - source: quotemedia.com

History of Major TSX Venture Corrections And What Followed

(I define a major correction as a 20% decline or more in the overall TSX Venture Index)

The TSX Venture officially formed in 2001. Its starting value was 1,000.

The TSX Venture's first major correction began on June 4, 2002 after it hit 1,244 (at that date it was a new all-time high). By October 30, 2002, it had bottomed out at 899.30 (losing 27% of its value). This marked a nearly 5 month long correction (downtrend). After bottoming out on October 30, 2002, the TSX Venture went on a 16 month rally and peaked out on February 17, 2004 at 1,931.61. This marked a 114% rally from bottom to top over that 16 month period.

The next significant correction occurred from February 17, 2004 through to July 27, 2004. This was when the exchanged collapsed from 1,931.61 to 1,467.59 - a modest correction in comparison to what we are seeing today. Over that 5.5 month period, the TSX Venture lost 24% of its value. However, once it bottomed out on July 27, 2004, it proceeded to go on an 8 month rally and touched 2,040.29 on March 7, 2005. This marked a 39% gain for the TSX Venture in that 8 month period.

The next significant correction was short-lived. The TSX Venture Exchange dropped from 2,040.29 on March 7, 2005 and bottomed out on May 17, 2005 at 1,593.63. This marked a 2 month decline of 22%. It was quite a vicious decline considering how quickly it happened. However, once the correction bottomed out, the TSX Venture went on a monster rally. After bottoming on May 17, 2005 at 1,593.63, the TSX Venture went on a 12 month rally to 3,292.49 (hit May 11, 2006). This marked a gain of 106% in a year.

Following that massive rally, the TSX Venture collapsed from 3,292.49 on May 11, 2006, to 2,322.48 on October 4, 2006. This marked a 5 month decline of 29.5%. However, following that correction, the TSX Venture rallied to all-time highs. It hit 3,369.79 on May 7, 2007. This marked a 7 month gain of 45%.

The next significant correction, after the TSX Venture hit an all-time high, was short and vicious. The TSX Venture went from 3,369.79 on May 7, 2007 to 2,445.23 on August 16, 2007. This marked a 3 month decline of 27.5%. However, following that correction, the TSX Venture rallied to 3,173.64 on November 6, 2007. This marked a 3 month gain of 29.5%.

The next significant correction was the worst any of us have ever seen, but it set up a golden rally for those that stayed at the table and kept buying. After hitting 3,173.64 on November 6, 2007, the TSX Venture went on a 13 month decline and bottomed out at 686 on December 9, 2008. This marked a 78.3% decline over a 13 month period. Great companies with world-class assets were deemed worthless by the market. What a mistake that turned out to be for those selling anywhere near the lows. After the TSX Venture bottomed out, it went on a 27 month rally and hit 2,439.83 on March 4, 2011. This marked a 255% gain in just over 2 years - the greatest rally for any of the major markets in North America during that time period.

The next significant correction for the TSX Venture is the one we currently find ourselves in. Although there was a short-lived rally at the start of 2012, the downtrend in the TSX Venture has been steady since March 4th of last year. Since hitting 2,439.83 on March 4, 2011, the TSX Venture has collapsed down to as low as 1333 on October 4, 2011 (it has been bumping along the bottom ever since). That marks a 45.5% decline from its March 4th 2011 value. That also marks the 2nd largest drop in the history of this exchange. Now, given that we have been bumping along near the bottom of this collapse for 7 months, one can argue that 'this time is different'. However, every time a market crash occurs, that argument is brought to the forefront.

Those are the statistics behind the 7 crashes the TSX Venture has experienced in its 11 year existence. Crashes and rallies are a part of its genetic make-up. No one will deny that it's a boom/bust index and if timed well (doesn't have to be perfect), it can make investors fantastic returns in very short periods. This is what will keep investors coming back to the TSX Venture - the greed factor. Let's look at the TSX Venture's historical averages:

Average loss (in percentage terms) during a correction (peak-to-trough): -36.25%

Average duration of a bear market in the TSX Venture: 5.78 months

Average gain after a correction (trough-to-peak): 98.08%

Average duration of a bull market in TSX Venture: 11.83 months

It can be argued which stage the Venture is in for its boom/bust cycle right now. However, historical statistics are showing us that at these levels, the Venture is looking like a buy. There is no doubt that volatility is going to be around for a long period of time (for all stock exchanges), but that isn't necessarily a bad thing.

Inflation is good for the value of commodities and the TSX Venture exchange is heavily weighted towards exploration companies. With growth stalling world-wide, global stimulus is inevitable in my opinion. QE3 will come in one form or another. Japan is already adding to its stimulus programs. The ECB has stated that more easing is needed and China is weighing options for further stimulus as well. With the UK officially entering a double-dip recession, it's likely to continue printing. This is all good news for commodity based investment.

Let's not forget about what tax season can do for smaller, illiquid stocks (ones that trade on the Venture). It's often overlooked, but the end of April is when personal income tax is due. Quite often at this time of year you'll see more pressure on the smaller exchanges because individuals need to cover tax burdens. Individuals (specifically the self-employed) are scrounging up some extra cash to pay the tax man right now.

Another bullish point to consider is that we are approaching drilling season for many explorers. Companies have either started drilling or will be soon thanks to the warmer weather and all the money raised over the past 18 months (which were strong periods for financings).

Drill results are coming...new discoveries are a guarantee in the next 3 months. The advantage for people like us is that we can get in before these results are produced; and we can do so for nearly 50% cheaper than 12 months ago.

An interesting statistic I found on the TSX website (TMX.com) was that "total financings raised in March 2012 was up 182% compared to February 2012 [for the TSX Venture]."

Could this be a sign that the smart money believes a bottom in the Venture has been established?

Rick Rule, one of the most successful junior resource investors on the planet, recently wrote an article titled "Why I'm Excited About This Gold Market".

Rick stated "As experienced junior gold speculators know, nothing adds to share value like discovery. Speculators will fondly remember hundredfold profits from discoveries like Diamond Fields and Arequipa. We are now truly in a discovery cycle, one fueled by sustained capital investments in unprecedented amounts. Better yet, we have been able to explore frontier terrain that was off limits due to politics or social turmoil. This will add spectacular real value, and this prospectivity is discounted in the current market."

He goes on to state "First, recognize that markets work, but only in the longer term. If you can't handle that, find another avocation. The cure for low prices is low prices; the cure for high prices is high prices. In order to sell high, you must buy low. What is the appropriate response to a strong market? Sell! What is the appropriate response to a weak market? Buy! Be a contrarian or be a victim."

This article represents solely the opinions of Aaron Hoddinott. Aaron Hoddinott is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information is of an impersonal nature and should not be construed as individualized advice or investment recommendations.

The market studies in this post interest me. I know that a bear market is often defined as a decline of 20% or more. This makes sense for an index like the S&P 500 or the Dow, but for a volatile market like the TSX Venture, you get a lot of "bear markets" that look like corrections when you see them on a chart. By corrections, I mean interruptions in the primary trend. Perhaps future studies could filter these more minor downmoves out.

Speaking of wishlists, I wish I could get my hands on VSE price and volume data from the 90s and 80s, and even earlier.

Great post, by the way, and odds are you are correct about the coming upturn. Reminds me of what Rick Rule said: I'm long past confusing inevitable for imminent.

Yes ,QE 3 will help gold equities. my problem is ,I know some of the gold juniors and even silver juniors have cash ,lots ,however ,Do they have the huge cash amounts to develop a mine ?.In many cases ,that's into the billions.Equity financing is out of the question because the share prices are too low. Share prices are too low because ; they are unable to attain traditional financing and major short positions are being placed on gold and silver equities(maybe not directly ).These short positions are solid and made to keep these companies and the entire resource industry at bay.Lets not forget the growing short positions on the commodities themselves.(G&S) How long ? I dunno,but I think it has a direct correlation to American politics. It's a big circle,and gold and silver stocks are in a whirlpool. IE: Why is my trusted producer of silver with no debt ,solid production and plenty of cash that is NOT needed for a major expansion,GOING DOWN HEAVILY. US Silver is being slaughtered. I held because I became too attached.I could live with it because I'm not underwater but my wife is and that's a scary scenario. I want these equities to go up Aaron. I know they should but... it's all about "Where the free money is going" and unfortunately that answer runs contrary to our interest at this time. . The Fiat people want investors to believe that gold and silver are risky and the way they accomplish that feat is in the markets which imo are corrupted by huge amounts of cash ,able to be directed where ever they choose,therefore they can win ,at least temporarily.

Fundamentally strong gold stocks are a screaming buy in my opinion. I know that’s a vague classification, but you understand what I mean. Of course every investment I make is from a risk/reward standpoint. Right now, the reward potential for juniors far outweighs the risk potential in my opinion. I see some advanced junior gold stocks trading at levels where the downside (in a complete collapse) is probably 50% (2008 price levels); whereas the upside is 300 or 400%. And that's not being unrealistic. Many of these stocks were trading 300% or 400% higher just last year. Don’t forget that the juniors went on a money-raising spree over the last two years and many have tons of cash in the bank. So they aren’t all necessarily as desperate for cash as one may presume. If we see another 200 or 300 point drop in the Venture, some of these juniors will be trading at cash value or close to (particularly the early staged juniors on the verge of making a discovery).

My whole point in all of this is that the risk/reward is more on our side than it has been in 3 years. Yet very few people want to buy... go figure. If you dollar cost average, I don't believe now is a premature time to buy. As you said, patience is what is needed.

Aaron; I see what you mean about interest rates being historically low and further QE being probable.Both good signs for gold.Usually gold stocks but....although I do think that carefully chosen gold stocks will increase in value over the next few months,I think it's because of their particular advantages (in assets and possible business plan),not an across the board gain for gold stocks. The lions share of gold and silver stocks will continue to depreciate ,mostly through equity financing and share consolidations.True ,that there is cheap credit ,but not for them. I am absolutely shocked at some price values being given some explorers that literally have defined resources,in some cases reserves into the multiple billions of dollars. .They cannot afford to finance the development of their projects and everybody knows it,so why would their share price increase dramatically,if gold stays in the under 2000 area.? In this election year,a substantial increase in gold is unlikely . The only share price increases in gold stocks will come from extremely patient investors . With the White House up for grabs and neither candidates backers wanting what we all seem to believe,that gold will be currency collateral.,gold and gold stocks cannot realistically advance. Therefore,a rise in gold and silver stocks seems destined to be nothing more than short term trading over the next several months Large Fund managers in the Fiat camp can make that a reality..Like I said,we could have some particular stocks shoot up but I feel that will be more about the good standing of the company ,not gold. Possibly some stocks where financing is not a problem.They are hard to find but do exist.I am a gold bull but I think this pause is going to last at least until there is a clear winner in the White House,not necessarily as long as November 7th.Long term investors in gold and silver equities can't really be hurt at these levels but it doesn't really mean a premature investment is warranted.

So long as credit remains cheap with these historically low rates, further QE remains almost a guarantee and central bankers remain net buyers of gold, then I remain bullish on gold miners. I do believe it pays (albeit patience is needed) to be a contrarian. And if you're going to play the TSX Venture, then you have to be able to stomach 25% to 50% swings in share value. Volume is so light these days that it doesn't take much for a stock to lose 20% in a trading day. However, with the light volume comes the potential for swift upswings as well.

I 100% agree that gold will be integrated into our currency system...I believe it already is given the central bankers beahviour of late.

A very worthwhile read Aaron. My view remains that the long term value of gold is that someday it will again be what currency is valued on ,in full or in part. Therefore ,it doesn't matter if the economy gets supposedly better because eventually it will need gold.Whether it is a crash of the World's financial markets or the slow reintegration of gold as currency collateral ,gold should hold value from where it is now despite the efforts of establishment cronies. The question about the miners remains negative ,because of the inability of credit by way of those same sources ,"crony capitalists." which do not want gold backed currency on any level.

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